Mohammad Reza Farzanegan
The Iranian middle class has long served as both the engine of economic modernization and the main carrier of social and political change. Its expansion—from the late Pahlavi era through the decades after the Islamic Revolution—largely rested on oil-driven growth that enabled upward mobility, entrepreneurship, and rising expectations for better governance.
Understanding how this pivotal group responds to major external shocks is therefore central to assessing Iran’s long-term development prospects.
A recent study by the author and Nader Habibi, published in the European Journal of Political Economy, examines a fundamental counterfactual question: How large would Iran’s middle class be today had the post-2012 sanctions not occurred?
To answer this, the researchers apply the synthetic control method, constructing a “counterfactual Iran”—a weighted combination of comparable, non-sanctioned economies such as Malaysia, Indonesia, Tunisia, Qatar, and Azerbaijan. These countries closely mirrored Iran’s pre-2012 trajectory in income levels and middle-class expansion, making them suitable benchmarks.
The study defines the middle class using an absolute, PPP-based standard: individuals with $11–$110 in daily per-capita income or consumption (2011 prices). This avoids distortions that arise from relative definitions, which can mask true declines in living standards during recessions.
Stark Findings
The findings are stark. After 2012, real Iran sharply diverged from its counterfactual path. While the synthetic model suggests the middle class would have continued expanding gradually, the observed trend reveals a persistent and deep contraction.
Quantitatively, sanctions reduced the population share of the middle class by an average of 17 percentage points per year between 2012 and 2019. By 2019, the gap peaked at 28 percentage points.
Qualitative evidence aligns with these results: World Values Survey data show the share of Iranians who identify as “middle income” falling from 78.7% in 2005 to 63.7% in 2020—a visible socio-economic identity crisis.
Crucially, the 17-point contraction reflects not merely the direct economic shock of sanctions—lower oil revenues, financial isolation, trade disruptions—but also the government’s endogenous responses, including misallocation, corruption, and institutional weakening.
The study identifies several transmission channels: a cumulative decline of roughly $3,000 in real per-capita income, sharp drops in imports and investment, erosion of real wages, and a rising share of vulnerable, informal employment.
Essential Reforms
A second strand of research by the author and Reza Zamani provides additional institutional insight. Drawing on data from 1962 to 2019, it finds that positive oil-revenue shocks significantly increase corruption.
This implies that even a post-sanctions oil windfall could undermine economic and institutional recovery unless governance reforms are implemented. Oil rents reduce the state’s reliance on taxation, weaken accountability, and encourage off-budget, opaque spending—conditions conducive to corruption and harmful to middle-class stability.
Taken together, these findings point to a “compound tragedy”: external sanctions interacting with domestic institutional fragilities rooted in oil dependency. Simply lifting sanctions will not restore the Iranian middle class.
Without deep structural reforms—greater transparency in the allocation of oil revenues, stronger anti-corruption institutions, and mechanisms that enhance citizen oversight—any external shock, positive or negative, will continue to place this essential group under severe pressure.
A longer version of this article was first published in Farsi by Donya-e Eqtesad daily.
